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NZ Morning Focus

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Fuseworks Media
Fuseworks Media

HIGHLIGHTS

- A further depreciation in the CNY and concerns over China's growth prospects rattled markets, prompting additional weakness in US and European equity markets.

- The USD came under broad-based pressure, boosting G10 currencies.

- UK labour data disappointed market expectations.

OUTLOOK UPCOMING TODAY: The NZ PMI is out at 10:30am and food prices at 10:45am. Australia has consumer inflation expectations at 1pm NZT.

CURRENCY: Markets are watching for another higher Chinese "central parity rate", but are uncertain as to the impact on AUD and NZD. ECB minutes and US retail sales will provide a data distraction, but USD positioning is likely to continue to dominate.

RATES: Local yields are expected to open under a little further downward pressure given overnight moves.

REVIEW

CURRENCY: Official selling in USD/CNY saw a bid tone to NZD and AUD, while markets re-evaluated Fed time-lines, concluding risks of delays, and saw USD across the board. GBP was also weak after employment disappointed.

GLOBAL MARKETS OVERVIEW: A further depreciation in the CNY and concerns over China's growth prospects rattled markets through the European session, prompting additional weakness in European equity markets. The German DAX declined a further 3.3% and is down 5.9% over the past two sessions, on concerns that earnings from exporters leveraged to the Chinese economy will come under pressure. US equities indices dropped initially but recovered to be broadly unchanged. In fixed income markets, core euro area sovereign bonds continued to rally, with US Treasury yields down slightly. However, peripheral euro area sovereign bond yields rose following reports that the German government needed to see progress on a number of fronts before it would approve the Greece bailout proposals. In commodities markets, oil prices rose marginally on the back of the weaker USD and gold prices rose 1.3%.

ANZ'S ASSESSMENT WHEN DOES A ONE-OFF BECOME A TREND? While it is very early days, this looks likely to become the key question for the PBoC as the second day of the new FX regime saw the yuan drop again. It is believed that the PBoC intervened heavily to mitigate the fall, something that is likely to be an ongoing feature should the market keep attempting to bolt, 2% at a time. On the one hand China's exporters need a lower currency, with exports down more than 8% y/y; on the other hand, daily falls can quickly cumulate to large moves and previous RMB stability has encouraged significant amounts of foreign borrowing in USD - those corporates will not be at all happy. A lower RMB is not good for global commodity prices in that it reduces China's purchasing power. However, it is tightening US monetary conditions via a higher USD, raising questions about the likelihood of a near-term Fed hike and the US interest rate path. This saw the USD come under pressure overnight, and a weaker USD generally is good for commodity prices, all else equal (gold and oil benefited). Nothing else is ever equal though; it is sobering just how many global commodities across a range of sectors seem to be experiencing excess supply conditions. Asia is in a trade recession; emerging markets are going to come under even more pressure from China's RMB move; volatility is rising. Buckle up.

OVERNIGHT SPECIFICS AND KEY EVENTS

- US: The JOLTS data showed that the number of unemployed people (actively looking for work) per open job declined to 1.58 in June from 1.62 - the lowest rate since 2007. However, the number of job openings eased modestly to 5.23m in June from 5.36m. Nonetheless, these data are reflective of robust labour market conditions.

- UK: Labour market data moderated further in June. Employment declined 63k (exp. -55k) over the three months to June, but the unemployment rate remained stable at 5.6%. Importantly, average hourly earnings growth eased to 2.4% y/y (mkt: 2.8% y/y) from 3.2% y/y as the boost from bonus payments unwound their earlier strength. As such, wages growth remains fairly tepid, despite the reduction in spare capacity. This doesn't help the more hawkish members of the MPC who have been relying on a pick-up in wages growth to justify the need for rates hikes, given the weak inflationary backdrop. The weaker data failed to make a dent in sterling, however, which remained resilient due to the weakness in the USD.

- Australia: RBA Deputy Governor Lowe's speech provided little new information in regards to the Bank's thinking in monetary policy. He noted that the response of household consumption to higher house prices has been more limited than in previous episodes, likely reflecting "slower expected future income growth and increased concerns about future housing costs." In terms of household balance sheets, Lowe argued that on average they are a little more risky than they once were. As such, "it is unlikely to be in our long-term interest for a consumption boom to be financed by a pick-up in household borrowing." Finally, Lowe echoed the theme of recent comments from RBA Governor Stevens that while monetary policy has a role in promoting sustainable growth more needs to be done elsewhere. In particular, Lower flagged policy options such as increasing infrastructure investment, improving innovation and reducing regulation.

- Equities had another poor night, particularly in Europe. The major US bourses fell initially but subsequently rallied to be broadly unchanged at the time of writing. German stocks were again hard hit, with the DAX declining a further 3.3% on concerns that China's currency devaluation will damage the German export engine. The Euro Stoxx finished 3.4% lower, while the FTSE 100 fell 1.4%.

- Bond market moves were smaller overnight but continued the rallying theme. US Treasuries 10-year yields were little changed, holding onto yesterday's large fall (sitting at 2.14% at the time of writing). In Europe, German (-3bps) and UK (-2bps) 10-year yields closed lower. However, peripheral yields rose (Italy and Spain +4bps, Portugal +7bp, Greece +9bps) on concerns the Greece bailout deal is not out of the woods yet.

- Commodities declined again, but by less than yesterday, with the CRB index down 0.2%. A bounce-back in oil prices (WTI crude +0.5%, Brent +1.0%) and gold (+1.3%) offset falls in grains (with soybeans, corn and wheat all down 3 to 6%), nickel and aluminium.

NZD/USD: AND BACK TO THE FED...

NZD/USD created a new cycle low, courtesy of another higher USD/CNY "central parity rate" and weaker July Chinese data. However, USD/CNY sold-off from limit up (6.45) to close near to the day's lows at 6.3858. This was reported to be due to official RMB buying. This started a bounce that extended 180 pips (trough to peak). Markets refocused on what declines in USD/CNY would mean for the Fed, with expectations for hikes pared back. This saw USD sold across the board and left markets reeling.

Expected range: 0.6550 - 0.6680

NZD/AUD: AUD BETA...

The AUD beta (reaction to) to Chinese news is still larger than the kiwi beta. Thus with Chinese data underperforming so too did the AUD. A speech by Deputy Governor Lowe added little to Australia's monetary policy debate.

Expected range: 0.8920 - 0.9020

NZD/EUR: INDUSTRIAL PRODUCTION...

European industrial production (-0.4%) added to sentiment that the world is going back into a sub-par growth trend, which keeps the global easy policy flowing. The ECB minutes tonight are sure to reinforce the QE taps are open.

Expected range: 0.5880 - 0.6010

NZD/JPY: SEEKING STABILITY...

Stable JPY characteristics ensured this cross was one of the more stable overnight with markets happy to own JPY, while other positions were pared.

Expected range: 81.60 - 82.60

NZD/GBP: IF THE FED IS PUT BACK, SO IS THE BOE...

Weaker wages and employment added to sentiment that if the Fed is being delayed, then so too will the BoE, leaving the Sterling an underperformer.

Expected range: 0.4200 - 0.4280

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